The indifference curve

The ordinal utility analysis is also known

as indifference curve approach to utility

maximization
An indifference curve is the locus of
infinite combinations of two commodities
which yield the same total utility to the
consumer

Preference Set- Indifference

Curves
Indifference Curve:

Combination of goods that yield the same

level of satisfaction.
Properties of Indifference curves:
- Slope downward
- Convex to the origin
- Non intersecting

Slope of indifference curve

The marginal rate of substitution is the

slope of indifference curve.

The amount of rice that a consumer is
willing to give up to obtain one additional
unit of wheat.
MRS = R/W = -MUw/MUr

Opportunity Set
Defined by Budget Constraint.
Pw=$1 +PR=$2 = $50

Graphically,
R
25

-Px/Py is the Slope

50

Slope of the budget constraint

The marginal rate of transformation (MRT)
The trade off the market imposes on the
consumer in terms of the amount of one
good the consumer must give up to obtain
more of the other good.
MRT= - PW/ PR = -1/2

What is a Budget Constraint?

A budget constraint shows the consumers

purchase opportunities as every combination of

two goods that can be bought at given prices
using a given amount of income.
The budget constraint measures the
combinations of purchases that a person can
afford to make with a given amount of monetary
income.

Consumers Equilibrium- The

Optimal Combination
y
e

x
At e slope of the budget line is equal to the slope
of the Indifference curve.

Consumers Equilibrium

Slope of the budget line: - Px/Py

Slope of Indifference curve: MUx/MUy
Equilibrium : MUx/MUy = Px/Py
or MUx/Px = MUy/Py

Chapter 3

Comparative Statics and

Demand

Price consumption Curve

By changing of price x while constant the

price of y and consumers tastes and money

income, we can drive the consumers price
consumption curve and demand curve for
commodity x. the price consumption curve
for commodity x is the locus of points of
consumer equilibrium resulting when only the
price of x is varied. The consumer demand
curve for commodity x shows the amount of
x that the consumer would purchase at
various prices of x, ceteris paribus.

Changes in equilibrium when

prices change
Relative price changes get reflected in changes
in
slope of the budget line.

New point of tangency between the indifference

curve and the new budget line

Effect of a Change in the Price of

Soup on Consumption

Individual Demand Curves

Price-consumption curve includes all the

information needed to plot an individuals

demand curve
An individual demand curve:
Describes the relationship between the prices of a
good and the amount a consumer purchases
Holds everything else fixed

Price elasticity of demand measures sensitivity of

amount purchased to changes in the goods
price

Individual Demand Curve for Soup

Income and Demand

Income is another important consideration in consumer

decisions
A change in consumption that results from a change in
income is called an income effect
How do a consumers choices vary as his income
changes?
The income-consumption curve shows this, holding
everything else fixed

Effect of a Change in Income on

Consumption

Engel Curves
The Engel curve for a good shows the relationship

between income and the amount consumed, holding

everything else fixed
Measure income on the vertical axis and amount
consumed on the horizontal axis
Engel curve slopes upward for a normal good and
downward for an inferior one

Engel Curves for Soup and

Potatoes